Investing in Israeli SaaS Companies

This excellent podcast touches on three captivating topics—assessing SaaS companies, Israeli companies outsourcing programming to Eastern Europe, and venture debt.

Listeners will learn when SaaS companies should embrace the freemium model versus charging for multiple years of service upfront, when to (and when not to) charge on a per-seat basis, and the calculation of retention rates.

Anton discusses various facets of venture debt such as maturities, costs, conversion, covenants, and collateral (or lack thereof).

This podcast includes a discussion of the pros and cons of Israeli SaaS companies programming software in Eastern Europe. Anton discusses some of his portfolio companies such as Comeet and Guesty.

Anton Fedorov, Partner, Flashpoint Venture Capital

Anton Fedorov is a Partner at Flashpoint Venture Capital, which manages some $500 million through its offices in London, Tel Aviv, Riga,  and Warsaw. Anton is a venture capitalist and angel investor with vast experience in finance, tech project management, and SEO marketing. He is passionate about early-stage companies, scalable business models, and superb product teams.

 

Investing

Software

Flashpoint Venture Capital

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SHOW NOTES:

00:00:59 – Even seed investors or angel investors that are looking for partial liquidity …

I’m a partner at the VC firm. We basically focus on late C and pre-series A round, typically leasing them if we miss or for instance, don’t agree on, something that the founder and the founders take money elsewhere as they scale on, they might need venture debt. And we have a separate product that offers just that.

And there is a separate, doesn’t seem separate fund. And then later on, as the company scales and gets 1020 $30 million of revenue and the early shareholders, founders or early employees, or even seed investors or angel investors that are looking for partial liquidity, flashpoint secondary fund basically allows them to capitalize on their investments and take some partial liquidity home and we sit until the exit of it.

00:09:48 – Poland has definitely been a step up in these turbulent times probably we haven’t seen many Israeli companies going to indifference.

I think Romania has been on the rise over the last I would say three months since the war kicked off because hiring employees, scaling employee hiring in Ukraine proved to be challenging.

There’s quite a lot of relocation of people that needed to be handled to the western part of the country.

Those companies that were outsourcing they tried to diversify the pool of talent.

Poland has definitely been a step up in this turbulent times probably we haven’t seen many Israeli companies going to indifference it’s not something that we’ve seen mainly because the time zone you want to operate is the same and you’re quite constrained how far east you can actually go to have an effective team because management is always in Israel you need somebody within like one plus -1 hour that is basically bound within Central Europe.

00:28:23 – You don’t really need to raise equity dollars at a much lower valuation.

Most venture debt products, they have a three-year maturity. So in the startup world, three years or even in the high growth company, three years is quite a long period of time.

I think what we’ve seen is the contraction of cycles where historically you’ve fundraised around every 24 months.

Now you’re starting to see over the last couple of years, as there’s more capital, you start to see funding cycles contract like twelve to 18 months. So by the time the venture debt matures out, you might as well already raised another two rounds.

So that’s why it’s attractive.

You don’t really need to raise equity dollars at much lower valuation. You raise a venture debt which has a certain maturity, and if you have a solid business model that you know how to raise money, and you may not necessarily need to raise another $5 million of equity at a lower price, rather use that venture debt facility to bridge that gap, raise around, maybe even raise another round and then repay that loan so from the cost of capital to vehicle.

00:34:47 – There are some fees that are associated with closing. So depending on the level of competition you might have one of those components kind of be variable and it’s very quick 

I mean, everybody is sensitive when it comes to debt because people understand that it’s a product that needs to be returned. I think there’s still competition for that product.

And different vendors might have, depending on their cost of capital, might offer different incentives. But usually venture debt is comprised of several key portions. There is the interest rate, then there is the warrant part, which is basically some equity kicker which stimulates for taking that early stage risk for companies that have not maybe scaled yet to tens of millions of dollars of revenue.

And so that’s why it’s called venture. So there’s a small warranty apart which does really provide a lot of dilution and it’s very aligned with company because it’s usually taking the PPS of the last round or the average of the previous round of the next round.

And so we’re incentivized only the company is able to grow using our money. And then there are some fees that are associated with closing. So depending on the level of competition you might have one of those components kind of be variable and it’s very quick, it depends on some portions.

In different times of the market you might be sensitive on one thing and when equity prices go down, you might be less sensitive on the one part, but maybe more sensitive on the interest rate part.

00:40:16 – Obviously we look for companies at our stage that have strong product retention.

What we have developed internally, a rigorous scoring for founders, we’re proud of that. On one end, we try to give emotions out of our investments. And so what we have found to be the most prudent thing we want to look at is obviously the team. One and foremost.

I think if the team is capable, if the team is strong as is capable, it’s capable to hire you know, strong leaders that are able to take the company the next milestone. That’s number one. We still look at the great big market. Venture is a field where you can’t build a business of $10 million of revenue and be satisfied. You need a market that is a multi billion dollar market.

And obviously we look for companies at our stage that have strong product retention. What typical SaaS investors look for is net dollar retention. Gross dollar retention.

We want to understand that even if the net dollar retention is not 100 and 3150 percent, but only like 105 and 110%, how does the product roadmap is aligned to make sure that they’re able to go after larger customers?

And how will that product roadmap enable the company to expand the retention as it scales?

00:48:46 –   Developers love to test the products and they don’t like talking to the salespeople.

I think the challenge with the premium model is you really need to have strong believers in product-like growth and obviously that’s something that has been in the market and adopted quite significantly from many companies.

It’s a good model when your end customer usually doesn’t require sales to be involved in terms of the process. If you’re serving for example, SMBs or like lower mid-market companies, freemium model is a great one to differentiate yourself if other companies are not offering that. And so for example, we have like not an Israel company, but in the test automation space they do offer free trials, test trigger, you can test the software before you actually commit and buy it.

It’s a great marketing tool because developers love to test the products and they don’t like talking to the salespeople. So for developers niche it’s a very interesting one to offer specifically for them, for instance. But if you are serving like mid-market companies and enterprise customers, everybody is concerned with data and everybody is concerned with security. So it’s very hard for the mid-market and enterprise customers to lure them in with a freemium model.

OTHER RESOURCES:

1) Enhanced Negotiating Strategies: This two-day seminar discusses the most intense negotiating strategies and tactics allowed without violating your ethics or morals

2) Valuation of Emerging Technologies: This seminar provides an in-depth review of more than 20 Valuation Methodologies

3) Solution Nation – The Book: Learn how the world’s most disadvantaged and destitute people stand to benefit from Israeli ingenuity.